1. In the US, frackinga type of 'unconventional
gas' involving the extraction of oil or gas using water, sand
and chemicals injected under pressure to split shale depositshas
produced a 'shale gas revolution'. In 2013, 11.4bn cubic feet
of shale gas from fracking was produced in the US, a nearly nine-fold
increase from 2007, and the well-head price of natural gas fell
from $6.3/thousand cubic feet in 2007 to $2.7 in 2012.[1]
The state of development of fracking as a potential energy source
in the UK lags behind the United States, but is now reaching a
critical stage. Exploratory drilling has begun, and the Government
has introduced tax concessions and is seeking through its Infrastructure
Bill to ease the process for fracking operations.

2. The most recent onshore petroleum exploration
and development licences were awarded in 2008. Following planning
permission, consent was given to drill for shale gas in five locations.
Of these, consent for fracking of the shale was subsequently given
for two sites near Blackpool. DECC opened the process for awarding
the next round of exploration and development licences in July
2014.

3. Cuadrilla, which holds those two fracking licences,
is the first company to use modern fracking techniques in the
UK. Their exploratory drilling operations at Preese Hall near
Blackpool were halted in 2011 until the end of 2012 following
two earth tremors linked to their activities. The company has
submitted two further planning applications for new exploratory
wells near Blackpool. It is expected that, if successful, these
applications will pave the way for further planning applications
at other sites granted licences in 2008 and from other companies.

4. In Budget 2013 the Government said that it would
introduce a new field allowance for shale gas and in July 2013
it launched a consultation on tax incentives for drilling companies.
In the 2013 Autumn Statement the Government announced that the
tax rate on a portion of fracking companies' profits would be
reduced from 62% to 30% and that companies would receive a tax
allowance equal to 75% of the capital expenditure on projects.
The Prime Minster announced in January 2014 that councils would
be able to keep 100% of business rates collected from shale gas
sites, doubling the previous 50% under the Government's business
rate retention scheme. He said:

A key part of our long-term economic plan to
secure Britain's future is to back businesses with better infrastructure.
That's why we're going all out for shale. It will mean more jobs
and opportunities for people, and economic security for our country.[2]

The Government estimated that the increase could
be worth up to £1.7 million for a typical 12 well site.[3]

5. In the 2014 Autumn Statement the Chancellor stated
that "The government is taking steps to ensure that the UK
leads the way with shale gas regulation. Shale gas could increase
the UK's energy security, support thousands of jobs, reduce carbon
emissions, and generate substantial tax revenue."[4]
The Autumn Statement announced:

· a
£5 million fund to provide independent evidence to the public
about the robustness of the existing regulatory regime.[5]

· £31 million
of funding to create sub-surface research test centres through
the Natural Environment Research Council, intended "to establish
world leading knowledge which will be applicable to a wide range
of energy technologies including shale gas and carbon capture
and storage".[6]

· setting up
a long-term investment fund from tax revenues from shale "for
the North and other areas hosting shale gas developments, to capture
the economic benefits of shale gas for future generations".[7]

· arrangements
to make 'community payments' by fracking companies compulsory
if they failed to make them voluntarily (paragraph 7).

The Autumn Statement also included a Government "commit[ment]
to maximising the economic benefits of the oil and gas resources
in the UK Continental Shelf [UKCS]. With the equivalent of between
11 and 21 billion barrels of oil still to be exploited, the UKCS
can continue to provide considerable economic benefits to the
UK through increased energy security, a stronger balance of payments
position, high-value jobs and further development of the UK's
strong, export-focused supply chain."[8]

6. In our Energy Subsidies report in 2014
we criticised the financial support for fracking announced in
the 2013 Autumn Statement. We noted that a justification sometimes
put forward for subsidies was to promote 'infant industries',
including renewable energy technologies, but we criticised the
Government's reduction of taxes on fracking profits: "Fracking
is not a technology warranting financial support to become viable
and competitive, and on that basis it does not warrant subsidy
through a favourable tax treatment."[9]
The Government's view was that the reduced tax on profits was
"not directed specifically at hydraulic fracturing. The [tax]
allowance is designed to support onshore oil and gas projects
whose small size and technical challenge lead to higher costs,
making them economic but not commercially attractive at current
tax rates."[10]

7. The Infrastructure Bill[11]
includes provisions for the Government to produce a strategy for
"maximising the economic recovery of UK petroleum"[12]
(which includes oil and gas). It also includes provisions "to
introduce a right to use deep-level land" for "petroleum
or deep geothermal energy", including fracking, which will
ease the planning difficulties that energy companies would otherwise
face in getting access rights to shale deposits under landowners'
properties.[13] At present,
a drilling company must reach agreement with each landowner to
obtain rights of access. The new provisions follow a Government
consultation in 2014 on its Proposal for Underground Access
for the Extraction of Gas, Oil or Geothermal Energy.[14]
That consultation included a voluntary community payment of £20,000
for each horizontal well, previously agreed with the industry,
and the Bill includes provisions allowing the Government to impose
such community payments (paragraph 5).[15]

8. Fracking raises both climate change and wider
environmental issues. On climate change, the UK's overall emissionsfrom
all types of energy generation as well as from other sectorsare
required to be limited by 'carbon budgets'. Those budgets are
set under the Climate Change Act 2008, which requires the UK's
greenhouse gas emissions to be reduced by at least 80% by 2050
against a 1990 baseline. As a fossil fuel, fracked gas could impinge
on those carbon budgets. Environmental protection has been a central
issue for much of our work during this Parliament. We summed this
up in our 2014 Environmental Scorecard report,[16]
in which we identified inadequate progress on a range of areas
including air pollution, biodiversity, soils, the freshwater environment
and water availabilityall areas which might be vulnerable
from onshore fossil-fuel drilling operations.

Our inquiry

9. We received 70 written submissions, including
from community groups potentially affected by fracking operations.
We took oral evidence on 14 January from Tom Burke of E3G, Professor
Paul Stevens from Chatham House, Dr John Broderick from Tyndall
Centre Manchester, Dr Tony Grayling and Mark Ellis-Jones from
the Environment Agency, Jane Burston from the National Physical
Laboratory, Lord Smith who chairs the Task Force on Shale Gas,
and Steve Thompsett from UK Onshore Oil and Gas. We have undertaken
our inquiry against a backdrop of the Infrastructure Bill (paragraph
7) and we have resolved to publish this report to inform the Report-stage
and Third Reading of the Bill on 26 January. We are grateful to
all of those who gave evidence against the necessarily tight time-horizon
of our inquiry.

10. Other Committees have undertaken inquiries into
fracking.[17] The purpose
of our own inquiry has been to identify the extent to which fracking
would be consistent with the UK's climate change obligations (Part
2) and the environmental risks (Part 3).